Information Failure
- The aforementioned definition of economic efficiency is fine in theory
- However, for it to work in practise, consumers would need to have accurate, up-to-date information on the quality and prices of products that they want to consume
- It is a lack of this information that underpins most instances of market failure
- Increasingly, through things like the internet, we are provided with a mass of information about the products we want to buy.
- Also, better labelling on products such as good and drink help base our purchasing decisions
- Other products like tobacco and alcoholic drinks may contain information to limit or stop the consumption of a product
- In principle, the wealth of information should enable us to make rational decisions that are needed to maximise our own welfare and that of society
- If this is happening, then the market is working efficiently
- If it is not, then there will be an inefficient allocation of resources, and hence, market failure
- The problem of information failure is that decisions taken by consumers are based on ignorance, often due to inaccurate or incomplete information
- For example, where consumers are not aware of the benefits or harmful effects of consuming a particular product
- Where persuasive advertising results in consumption levels that are not in the best interests of consumers
- Where product packaging makes claims that are inaccurate or misleading.
- In some situations, the problem of information failure is known as asymmetric information.
- Examples include things like:
- Health Care – when you visit your doctor, you don’t have the same medical knowledge as them. You therefore rely on the doctor’s experience and knowledge to give you the treatment you need.
- Environment – As individuals, we know very little about the environmental consequences of driving cars or tipping waste. Environmental experts are more aware of these effects due to their own research.
- Consumer Purchases – What we originally think to be a good deal may not be so. Mobile phone contracts may be a nightmare to understand. The seller, who is on commission, has far more knowledge on such matters than the consumer, and as such, the consumer may make a bad choice due to the biased information of the seller.
- In these examples, the lack of accurate information has distorted how the market allocates resources
- In other words, the market has failed